Monday, February 15, 2010

FHA Mortgage? Be Careful About Your Lender.

Jane is from California and had been approved for an FHA loan on a single family residence. Her lender had told her that she needed two months reserves in the bank before closing or the loan would not close. She was confused by this last minute requirement and came to me for clarification.

Well, I was confused too! FHA does not have a requirement for reserves (unlike conventional loans). The only reserve requirements with FHA are if a buyer is purchasing a 3-4 family unit. If purchasing a 3-4 unit, the reserves required are three months.

The answer here was a no-brain-er and is actually available on the HUD website. There is however, a really big issue here. Can you see it? Bear with me, here is another example.

Another couple was approved for an FHA loan in March of 08 and the company they were working with said the couple had to pay their 2007 taxes before the lender would close the loan. Hello, 2007 taxes aren't due until April 2008. These nice people asked if there was a law that required them to pay something that was not due. Well, NO! There is not even an underwriting guideline that calls for it.

What is going on here? Do you see the big issue yet?

I have a web site where I answer Mortgage questions from home buyers, sellers, real estate agents, loan officers, and yes, even underwriters. These underwriters and loan officers are from some well know companies. This isn't about my web site, ... I'm not even going to give you the URL. I only bring it up because that is why I see a big picture that others can not. I receive questions every day from all over our country,... and other countries in the middle east.

I have several major issues with this information so far but I'm only going to cover two.

First, Why don't Loan Officers and Underwriters know basic FHA underwriting guidelines? Simple, they have no experience or training on FHA! FHA loans are and always have been a terrific option for people that didn't quite fit into conventional guidelines. Best of all the interest rate is considerably lower compared to a sub-prime loan and as I write this today FHA rates are equal to par on a Fannie Mae. It doesn't get any better than that, right?

Well, FHA loans are fairly complicated to put together and they used to have stringent appraisal and inspection requirements. So, if a borrower didn't fit into Fannie or Freddie it was easier and quicker to slap them into a sub-prime instead of FHA. Sub-prime was a slam dunk, ... and so what if the rates were higher on a sub-prime, few consumers understood their options anyway. (That mentality is why I built my site in 2002.)

Another reason companies didn't do FHA loans was because they had to be HUD approved which meant they had to have a minimum net worth and pass a costly Audit every year. So again, why bother when sub-prime was so easy and available.

Now, of course the sub-prime days are almost a thing of the past or at least not as "sub" as they use to be. The savior? ... FHA Loans of course, except that very few, including underwriters have any experience with them or understand the differences between FHA and Fannie. Thus, in the two examples above, underwriters and LOs are just making stuff up or worse case, running scared because of all the flack in the industry right now.

In defense of the underwriter (as in example two) I will say that they have the authority to require what ever they deem necessary to improve a portfolio. Many of the questions I have received from underwriters seem to reveal that it is usually a case of inexperience and over caution.

The mortgage industry professionals are struggling to catch up/learn FHA guidelines. If you are a consumer you must be very careful to find someone that has been HUD approved for at least two years. And Do Check, seriously. Some companies are doing FHA loans and they are not HUD approved. They are under the dis-illusionment that HUD will allow a non-HUD approved broker, to broker, to another HUD approved broker! Sounds a little flaky, no?

How in the world did we ever get in this mess? We can throw most of the blame to the politicians and presidential candidates that are hyping it up for their own agenda. It is not as bad as they say but they are speaking so loudly that the rest of the world is now listening. Did you read what is going on in the UK's market today? Good grief.

I don't believe in bailing out our large lending companies and here is why. Back in this article I mentioned getting questions from India and other countries in the middle east. Now I ask myself, why would a mortgage underwriter in India, who I can hardly understand due to "no speaking good English", be calling me on the telephone at 3:00am about a loan in Texas??

Go Figure!

(Update: Jan. 2012) This article applies today but now we all know what really happened and why. It is still going on. Worse, the Government is still doing Sub-prime, subsidised loans on the tax payer's dollar. (USDA Rural Developments 502 Direct home loans) These loans are sooo sup-prime that up until a few months ago food stamps were actually used as repayment income in the DTI calculation.

I received a phone call from a gentleman last week that is opening up a mortgage company and is looking for staff to run it. The company wants to originate and close loans, ... and package them to sell to investors in the middle east. ????
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Connie Sanders receives questions from consumers and mortgage professionals every day. Find out more about FHA Guidelines at: http://www.fha-mortgageunderwriters.com

Connie Sanders is a strong advocate for educating the consumer about mortgage loans before they apply for a loan. Connie put together a mortgage information web site at: Mortgage Underwriters and can be contacted there with any questions you may have.

3 comments:

Hi Connie, thanks for what you are saying here about LO's lack training. The other thing that struck me about your scenarios is whether or not the LO's were actually trying to get the borrowers FHA mortgages in the first place. It is possible that the customer service aspect of each of these lenders was so bad that they were trying pass themselves off as FHA lenders but were really trying to go through Fannie Mae or Freddie Mac.

There is much more to say about their lack of customer service - but hey, it is a problem that has been in the mortgage and real estate industries for a long long time.

For more consumer information about home buying please visit: Mortgage Qualification at http://getprequalified.com